The information contained on this blog is provided as a public service for informational purposes only and is not intended to be a comprehensive statement of the law. The reader is advised to check for changes to current law and to consult with a qualified attorney on any legal issue before taking action of any kind. The information presented on this site should not be construed to be formal legal advice or to create or imply the formation of a lawyer-client relationship between the reader and this firm.

Friday, June 1, 2018

Dangers of Lending Money to Your Business

Owners of small businesses continually fail to realize that their corporation or LLC is a separate legal entity that owes certain duties to its creditors. While it is tempting to lend money to your company in times of hardship and to pay yourself back once some money comes in, there is a very good chance you will have to eventually turn the money over to the company’s judgment creditors.

Both New York and New Jersey have Debtor and Creditor Laws, which protects creditors from fraudulent actions of their debtors. The laws have their own definitions that are different from what might be commonly believed. If a judgment creditor sues an owner of a company for taking money out of a failing business in fraud of creditors, the usual defense is that it was just a repayment of an existing loan and so there was fair consideration for the payment. In New York that defense will usually fail. First, most owners will fail to document the loan by a promissory note or by some other document. Failure to provide documentary evidence of the loan is fatal to the defense in both New York and New Jersey.